Year of Service Accrued Benefit

[Guest tscher]

Hi,

I participate in a defined benefit plan which allows me to accrue a benefit for the year after I work 1000 hours. If I terminate (assume fully vested) August 31, 2004 after working 1000 hours to be eligible for an accrual, I would receive 8/12 of my benefit for the year. If I take a leave of absence and return in 2005, I would receive 12/12ths (full) of my benefit. Is this an issue?

Thanks

Teddy

[JAY21]

Ted, it's a little hard to answer your question without seeing your company's legal plan document for more details. However, I believe there are probably some combinations of legal plan provisions that could produce the results you mentioned without raising a red flag. For example, if your initial eligibility waiting period requires 1000 hours, but then your actual accrual requirement was based upon a different criteria than 1000 hours (e.g., perhaps a liberal "elapsed time" method of accrual where a leave of absence does not reduce your accrual since you're technically still employed as of the end of the accrual measurement period). This combination, and probably some other combinations, may produce the results you mentioned where a leave of absence legitimately produces different results than a termination of employment.

I'd suggest confirming what the criteria is for an accrual vs. the initial eligibility requirements since they do not necessarily have to be the same.

[Guest tscher]

Thanks for your reply.

To take my issue a little further: If I work 1000 hours by August 31, 2004 I have satisfied the accrual requirements of my plan. However, If I terminate on August 31,2004 after working the 1000 hours I am only allowed to receive 8/12th of my yearly benefit (because I worked through August). Does the fact that I work 1000 hours, and satisfied my plans accrual requirement entitle me to a full year of benefits? Its almost as if there are two types of accrual requirements to get 12 months of benefits - 1. Work 1000 hours. and also 2. Work 12 months of the year. Does this violate any IRS/DOL laws?

Thanks

[JAY21]

I would agree that this sounds "unique" (maybe more). You can get a pro-rated accrual if the plan requires a higher hours of service threshold than 1000 hours (e.g., 2000), however, from your comments it sounds like someone working a full 12-months need only 1000 hours for a full (vs. pro-rated) accrual not 2000 hours.

Some of your comments hint at an "elapsed time" method (not hours of service counting) when you commented that someone on leave gets a full accrual (although a plan could credit Hours of Service for certain approved leaves). Under an elapsed time method 8/12ths might be the correct accrual portion for 8 months of employment, but I don't see how it can also be combined with a 1000 hour requirement.

I agree that it seems from your comments that your plan has dual approach of accruals; Hours-of-Service accrual and perhaps Elapsed Time Accruals (using partial years). I don't think you can have it both ways. Maybe our discussion will attract more definitive comments from other benefitslink commentators. I think you're right to question this. At the very least it's not a structure that I've ever seen.

[david rigby]

In general, I agree with Jay. More importantly than what you mean by "...8/12th of my yearly benefit...", how does the plan define an accrual for a plan year?

[Guest tscher]

The definition in the plan of the benefit accrual is 1000 hours. However the benefit accrual is prorated if even after working 1000 hours you terminate from the company prior to the end of the year. Based on my research, the DOL discusses the situation where the definition of benefit accrual of the plan is 2000 hours and you work 1000 hours, then your benefit may be pro-rated. However, based on the plan's definion of benefit accrual you only have to work 1000 hours - but even if you do but terminate prior to 12/31 of the year in question - you receive a pro-rated benefit for the year. Though I haven't found where the DOL or IRS discusses this situation it sounds to me that the benefit accrual raises a red flag. Do you agree?